Futures Algorithmic Trading: Is It Right for You?
Are you ready to start making more money in the marketplace?
Then you owe it to yourself to learn about futures algorithmic trading. The more you know about algo trading, the easier it’ll be to make wise trading choices.
For instance, some traders prefer a hands-off approach using algorithmic trading strategies. But is this right for everyone? To help you decide, we’ve created this guide to provide you with actionable trading advice.
Let’s look at what algorithmic trading is and some of the pros and cons to help you decide if it’s right for you.
Then you owe it to yourself to learn about futures algorithmic trading. The more you know about algo trading, the easier it’ll be to make wise trading choices.
For instance, some traders prefer a hands-off approach using algorithmic trading strategies. But is this right for everyone? To help you decide, we’ve created this guide to provide you with actionable trading advice.
Let’s look at what algorithmic trading is and some of the pros and cons to help you decide if it’s right for you.
What Is Futures Algorithmic Trading?
Futures algorithmic trading uses computer programs to make trading decisions. It can assist with futures trading, including commodities, stocks, and currencies.
For instance, let’s say you’re trading crude oil futures. You could create an algorithm that automatically buys when the price of crude oil falls below a certain level.
Then the algorithm can sell when it rises above that level. Or, you might create an algorithm that buys when the price of crude oil rises faster than the price of gasoline and sells when the reverse is true.
For instance, let’s say you’re trading crude oil futures. You could create an algorithm that automatically buys when the price of crude oil falls below a certain level.
Then the algorithm can sell when it rises above that level. Or, you might create an algorithm that buys when the price of crude oil rises faster than the price of gasoline and sells when the reverse is true.
Three Primary Types of Trading Systems
Discretionary Trading Systems
Discretionary systems are the most flexible. They allow traders to make decisions based on their judgment and experience.
An example of a discretionary system would be a trend-following strategy. In this type of system, a trader would buy when the price of an asset rises and sell when it’s falling.
Another example of a discretionary system would be a support and resistance strategy. In this type of system, a trader would buy when an asset’s price rises and approaches a resistance level.
Then the trader would sell when the asset’s falling and approaching a support level. Finally, a discretionary system could also be a combination of different strategies.
When to Use Discretionary System
When should you use a discretionary system? If you have experience trading, then a discretionary system might be right. However, if you’re new to trading or not confident in your ability to make decisions, you might want to consider using a mechanical system.
Advantages of Discretionary System
One of the main advantages of a discretionary system is that it can allow for more flexibility. Using a discretionary system, you can make decisions based on your judgment and intuition. This can be helpful if you have a good feel for the market or if you’re able to identify patterns that other traders might not be able to see.
Another advantage of a discretionary system is that it can help you to manage your risk better. When making decisions based on your own judgment, you can more easily manage your risk by only taking trades that you’re comfortable with. This can be helpful if you’re trying to limit your losses or if you’re looking to protect your capital.
Disadvantages of Discretionary System
One of the main disadvantages of a discretionary system is that it can be difficult to follow. It can be tough to know when to buy and sell if you’re new to trading. And even if you have experience, it can be easy to second-guess yourself.
Another disadvantage of the discretionary system is that it can be more time-consuming. If you’re using a discretionary system, you’ll need to analyze the market and make decisions. This can be difficult if you have a full-time job or if you’re trying to trade around other commitments.
Finally, a discretionary system can also be more expensive. If you’re using a discretionary system, you might need to pay for expert advice or software. And even if you’re not paying for anything, your time is still valuable.
An example of a discretionary system would be a trend-following strategy. In this type of system, a trader would buy when the price of an asset rises and sell when it’s falling.
Another example of a discretionary system would be a support and resistance strategy. In this type of system, a trader would buy when an asset’s price rises and approaches a resistance level.
Then the trader would sell when the asset’s falling and approaching a support level. Finally, a discretionary system could also be a combination of different strategies.
When to Use Discretionary System
When should you use a discretionary system? If you have experience trading, then a discretionary system might be right. However, if you’re new to trading or not confident in your ability to make decisions, you might want to consider using a mechanical system.
Advantages of Discretionary System
One of the main advantages of a discretionary system is that it can allow for more flexibility. Using a discretionary system, you can make decisions based on your judgment and intuition. This can be helpful if you have a good feel for the market or if you’re able to identify patterns that other traders might not be able to see.
Another advantage of a discretionary system is that it can help you to manage your risk better. When making decisions based on your own judgment, you can more easily manage your risk by only taking trades that you’re comfortable with. This can be helpful if you’re trying to limit your losses or if you’re looking to protect your capital.
Disadvantages of Discretionary System
One of the main disadvantages of a discretionary system is that it can be difficult to follow. It can be tough to know when to buy and sell if you’re new to trading. And even if you have experience, it can be easy to second-guess yourself.
Another disadvantage of the discretionary system is that it can be more time-consuming. If you’re using a discretionary system, you’ll need to analyze the market and make decisions. This can be difficult if you have a full-time job or if you’re trying to trade around other commitments.
Finally, a discretionary system can also be more expensive. If you’re using a discretionary system, you might need to pay for expert advice or software. And even if you’re not paying for anything, your time is still valuable.
Mechanical/Algo/Algorithmic Trading Systems
Mechanical systems are less flexible than discretionary systems. However, they’re also less subject to human error.
What makes mechanical systems so efficient? It has to do with their rules-based approach. Mechanical systems made choices using pre-defined parameters. An example of a mechanical system would be a moving average crossover strategy.
When to Use Mechanical System
Since mechanical systems follow a set of rules, they’re more suited for hands-off investors who want to automate their trading. IAre you a brand new trader? If so, then a mechanical system might be right for you.
Advantages of Mechanical System
One of the main advantages of a mechanical system is that it can take the emotion out of trading. When you’re following a set of rules, you’re less likely to let your emotions impact your decisions. This can be helpful if you tend to make impulsive decisions or if you find it difficult to stick to a plan. You can also use these tips to help keep your emotions in check as you trade.
Another advantage of a mechanical system is that it can be more objective. If you’re following a set of rules, you’re less likely to let your personal biases impact your decisions. This can be helpful if you tend to give into your emotions or if you have a hard time staying disciplined.
Disadvantages of Mechanical System
One of the main disadvantages of a mechanical system is that it can be inflexible. If the market changes, a mechanical system might not be able to adapt. This can be problematic if you’re trying to trade in a volatile market.
Another disadvantage of a mechanical system is that it can be difficult to build. You’ll need to have a good understanding of technical analysis, and you’ll need to backtest your system to ensure that it works. This can be time-consuming and complex, especially if you’re new to trading.
Finally, mechanical systems can also be expensive. If you’re using a commercial system, you might need to pay for software or data. And even if you’re not paying for anything, your time is still valuable. Of course, if you have the time and money, a mechanical system can be worth the investment. You can learn how to set a budget for long-term goals, so the cost of the software isn’t such a hit to your monthly finances.
What makes mechanical systems so efficient? It has to do with their rules-based approach. Mechanical systems made choices using pre-defined parameters. An example of a mechanical system would be a moving average crossover strategy.
When to Use Mechanical System
Since mechanical systems follow a set of rules, they’re more suited for hands-off investors who want to automate their trading. IAre you a brand new trader? If so, then a mechanical system might be right for you.
Advantages of Mechanical System
One of the main advantages of a mechanical system is that it can take the emotion out of trading. When you’re following a set of rules, you’re less likely to let your emotions impact your decisions. This can be helpful if you tend to make impulsive decisions or if you find it difficult to stick to a plan. You can also use these tips to help keep your emotions in check as you trade.
Another advantage of a mechanical system is that it can be more objective. If you’re following a set of rules, you’re less likely to let your personal biases impact your decisions. This can be helpful if you tend to give into your emotions or if you have a hard time staying disciplined.
Disadvantages of Mechanical System
One of the main disadvantages of a mechanical system is that it can be inflexible. If the market changes, a mechanical system might not be able to adapt. This can be problematic if you’re trying to trade in a volatile market.
Another disadvantage of a mechanical system is that it can be difficult to build. You’ll need to have a good understanding of technical analysis, and you’ll need to backtest your system to ensure that it works. This can be time-consuming and complex, especially if you’re new to trading.
Finally, mechanical systems can also be expensive. If you’re using a commercial system, you might need to pay for software or data. And even if you’re not paying for anything, your time is still valuable. Of course, if you have the time and money, a mechanical system can be worth the investment. You can learn how to set a budget for long-term goals, so the cost of the software isn’t such a hit to your monthly finances.
Black-Box System
Black-box systems are the most complex and use artificial intelligence to make decisions. These systems are also the most expensive and the most difficult to build. An example of a black box system is a self-driving car.
A black box system is a system where the inner workings are unknown or hidden from the users. This can be for many reasons, such as security or simply to make the system seem more complex than it really is. Black box systems are often seen as being mysterious and difficult to understand.
However, black-box systems can be very powerful and efficient. They can make decisions based on a large amount of data, learning and adapting over time. Black box systems are often used in fields where human decision-making is not possible or practical, such as in finance or healthcare.
When to Use a Black-Box System
If you’re an experienced trader with a deep understanding of technical analysis, then a black-box system might be right. These systems can be helpful if you’re trying to trade in a volatile market or looking for an edge over other traders.
Advantages of Black-Box System
One of the main advantages of a black-box system is that it can be very flexible. These systems can adapt to changing market conditions quickly and easily. This can be helpful if you’re trying to trade in a volatile market.
Another advantage of a black-box system is that it can make complex decisions. These systems can take a large amount of data into account, and they can learn over time. This can be helpful if you’re looking for an edge over other traders.
Disadvantages of Black-Box System
Despite their advantages, black-box systems also have some disadvantages. One of the main disadvantages of a black-box system is that it can be costly. These systems often require specialized hardware and software. The software can be time-consuming to learn and complex to build.
Another disadvantage of a black box system is that it can be challenging to understand. These systems often use complex algorithms and data structures. The complexity can make black-box systems difficult to interpret. This can be problematic if you’re trying to troubleshoot a problem or if you need to make changes to the system.
A black box system is a system where the inner workings are unknown or hidden from the users. This can be for many reasons, such as security or simply to make the system seem more complex than it really is. Black box systems are often seen as being mysterious and difficult to understand.
However, black-box systems can be very powerful and efficient. They can make decisions based on a large amount of data, learning and adapting over time. Black box systems are often used in fields where human decision-making is not possible or practical, such as in finance or healthcare.
When to Use a Black-Box System
If you’re an experienced trader with a deep understanding of technical analysis, then a black-box system might be right. These systems can be helpful if you’re trying to trade in a volatile market or looking for an edge over other traders.
Advantages of Black-Box System
One of the main advantages of a black-box system is that it can be very flexible. These systems can adapt to changing market conditions quickly and easily. This can be helpful if you’re trying to trade in a volatile market.
Another advantage of a black-box system is that it can make complex decisions. These systems can take a large amount of data into account, and they can learn over time. This can be helpful if you’re looking for an edge over other traders.
Disadvantages of Black-Box System
Despite their advantages, black-box systems also have some disadvantages. One of the main disadvantages of a black-box system is that it can be costly. These systems often require specialized hardware and software. The software can be time-consuming to learn and complex to build.
Another disadvantage of a black box system is that it can be challenging to understand. These systems often use complex algorithms and data structures. The complexity can make black-box systems difficult to interpret. This can be problematic if you’re trying to troubleshoot a problem or if you need to make changes to the system.
Data To Use In Algo Trading Systems
There are different types of data in futures trading. This data can assist with evaluating the market conditions and the prices of assets. The data can also help create the order book, which is the order in which traders buy and sell assets.
Market Data
The most common type of data used in futures algorithmic trading is market data. This data includes the prices of assets, the volume of trades, and the order book. Market data can help determine the market’s direction and the best time to buy or sell an asset.
Order Data
You’ll want to understand order data too. This data includes the order size, the order book, and the volume of trades. Order data can help determine the amount of risk a trader is willing to take.
Trade Data
Then there’s the trade data. This data includes the price of an asset, the volume of trades, and the order book. Trade data can help the trader determine when to buy or sell an asset.
Volume Data
Have you heard of volume data? This data includes the volume of trades and the order book. Volume data can also determine the best time to buy or sell an asset.
Price and Size Data
You’ll also want to learn about price data. This data includes the price of an asset and the volume of trades.
Don’t forget about size data. This data includes the order size and the order book. Order size data can be used to determine the amount of risk a trader is willing to take.
Of course, out of all these pieces, price is the most important piece of data. If you build algos with just price, you can build some very nice models.
The Benefits of Futures Trading
The benefits of using algorithmic trading strategies include the ability to trade 24 hours a day. You can create an effective trading schedule and stick to it to boost your productivity.
There’s also the advantage of backtesting your strategy before putting it into use. Not to mention the ability to place trades almost instantly.
Another benefit is that you can monitor multiple markets at once and make decisions based on a variety of criteria. While algo trading is not right for everyone, it can be an effective tool for those who can use it effectively.
Futures algorithmic trading can also help with taking advantage of market inefficiencies. You’ll also be gaining the ability to trade in a highly automated and efficient manner.
There’s also the advantage of backtesting your strategy before putting it into use. Not to mention the ability to place trades almost instantly.
Another benefit is that you can monitor multiple markets at once and make decisions based on a variety of criteria. While algo trading is not right for everyone, it can be an effective tool for those who can use it effectively.
Futures algorithmic trading can also help with taking advantage of market inefficiencies. You’ll also be gaining the ability to trade in a highly automated and efficient manner.
Risks of Algorithmic Trading
If you’re thinking about pursuing algo, it’s essential to do your research and ensure it’s right for you. There are several risks involved with algorithmic trading, and it’s not suitable for everyone. However, if you’re willing to take on the risks, algorithmic trading can be valuable in your futures trading arsenal.
To play it safe, you have to ensure that you’re going about trading in a safe way. Double-check your decision-making process, and get to the heart of why you’re interested in trading. If you’re serious about committing to the process and learning the ins and outs, you can make a lot of money.
There’s a lot that goes into futures algorithmic trading. Each system has its advantages and disadvantages, so selecting the right one for your needs is essential.
Work Efficiently With Futures Trading
What futures algorithmic trading system is right for you? If you like to be in control of your decisions, a discretionary system may be right for you. If you’re new to futures trading or don’t have time to actively manage your account, a mechanical or black-box system may be better.
KJ Trading is a place where experienced traders come for proven strategy advice. Our practical trading advice is based on real-world data, so you can get the results you want! Check out one of our trading guides so you can create a results-driven approach today.
To play it safe, you have to ensure that you’re going about trading in a safe way. Double-check your decision-making process, and get to the heart of why you’re interested in trading. If you’re serious about committing to the process and learning the ins and outs, you can make a lot of money.
There’s a lot that goes into futures algorithmic trading. Each system has its advantages and disadvantages, so selecting the right one for your needs is essential.
Work Efficiently With Futures Trading
What futures algorithmic trading system is right for you? If you like to be in control of your decisions, a discretionary system may be right for you. If you’re new to futures trading or don’t have time to actively manage your account, a mechanical or black-box system may be better.
KJ Trading is a place where experienced traders come for proven strategy advice. Our practical trading advice is based on real-world data, so you can get the results you want! Check out one of our trading guides so you can create a results-driven approach today.
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About The Author: Kevin Davey is an award winning private futures, forex and commodities trader. He has been trading for over 25 years.Three consecutive years, Kevin achieved over 100% annual returns in a real time, real money, year long trading contest, finishing in first or second place each of those years.
Kevin is the author of 5 highly acclaimed books, including "Building Algorithmic Trading Systems: A Trader's Journey From Data Mining to Monte Carlo Simulation to Live Trading" (Wiley 2014). Kevin provides a wealth of trading information at his website: https://www.kjtradingsystems.com
Copyright, Kevin Davey and KJ Trading Systems. All Rights Reserved. Reprint of above article is permitted, as long as the About The Author information is included.
Kevin is the author of 5 highly acclaimed books, including "Building Algorithmic Trading Systems: A Trader's Journey From Data Mining to Monte Carlo Simulation to Live Trading" (Wiley 2014). Kevin provides a wealth of trading information at his website: https://www.kjtradingsystems.com
Copyright, Kevin Davey and KJ Trading Systems. All Rights Reserved. Reprint of above article is permitted, as long as the About The Author information is included.